Difference Between 403b and IRA

Both 403b and IRA are targeted towards retirement planning. While Individual Retirement Account, or IRA, as it is generally known, is available for all to save for future, 403b, which gets its name from being listed in section 403(b) of US tax code is for specific categories of people mentioned 403(b).

403b is also referred to as TSA, or Tax Sheltered Annuity. Both the plans are great options for retirement, and if you have surplus funds, it is prudent to invest in both. But if you can afford only on these, you must choose after going through the pros and cons of both.

403b

In order to be eligible for 403b, a person needs to be working for an organization mentioned in section 501(c) of the US tax code, an employee in a school or hospital, or as a minister. 403b plans are offered by the employer and he has control over the money. The employer can choose 403b plans to be any of the following three types

1. He can enter into an annuity contract with an insurance company. These plans are then called tax sheltered annuities

2. He can take services of a retirement account custodian who can invest the money in mutual funds

3. He can go for retirement account where the investments ate made into annuities or mutual funds

Opening a 403b account is good both for the employee as well as an employer. The employee gets reduced taxable income and thus saves on tax, and also gets to enjoy shared cost of maintaining the account. The plan is good for the employer in the sense that high benefits keep the morale of the employees high.

IRA

This is a type of permanent savings account that a person can open and maintain all by himself. To be eligible, a person must earn less than $105000 if single, and leas than $167000 if married. There is a limit on the amount deposited in IRA which stands at $5000 per annum. The biggest advantage of an IRA plan is that benefits after the completion of the plan are exempt from federal taxes. You also have an access to the money in your account though there might be penalties before the completion of the plan.

Both are instruments of saving for the future, but 403b is available only to those mentioned in section 403(b) of the tax code. The major difference between the two is that while in 403b, the employer can make a contribution to the fund; this is not possible in an IRA. Then there are no income requirements to open a 403b as opposed to an IRA. These additions by the employer significantly increase the value of the fund. In case of a bankruptcy, the fund in 403b is safe and not to be touched for the creditors while IRA does not enjoy such immunity.

While there can be many variations of IRA’s. 403b is generally of a single type. There are penalties imposed upon a person withdrawing money from either an IRA or a 403b before his retirement.